Ofgem ‘must get its act together’

The energy market regulator, Ofgem, has been sharply criticised by MPs for failing to ensure consumers are getting the best value for money.

The Commons Energy and Climate Change Committee said new price caps intended to curb the costs of distributing and transmitting gas and electricity were too generous while performance targets were too low.

Committee chairman Tim Yeo said a warning by Ofgem chief executive Dermot Nolan that it could be eight years before it was clear whether the new system was delivering value for money was too long for consumers to wait.

The so-called “network costs” currently account for around 23% of a dual fuel (gas and electricity) bill.

They are passed on to consumers by the energy suppliers who are charged by the network companies for using their transmission and distribution infrastructure.

In 2013, Ofgem introduced a new price control framework known as RIIO (revenue = incentives + innovation + outputs), which was designed to ensure that costs were competitive and profits were not excessive.

However, the committee said there was “clear evidence” that the network companies were making higher profits than expected.

“This suggests that the targets and incentives set by Ofgem are too low, barriers to market entry are high and that Ofgem needs to monitor RIIO more effectively and to equip RIIO with stronger, corrective measures,” it said.

“While we recognise that the new RIIO framework is an improvement on its predecessor, Ofgem has not yet created the conditions for the market to thrive and provide consumers with best value for money.”

The committee also highlighted the complexity of the charging system, with a combination of codes and regional charges across the UK making it difficult to compare price and performance across the network companies.

It called on the Government and Ofgem to conduct an in-depth study into the merits of replacing the current system with a standard national tariff.

Mr Yeo said: “Ofgem’s chief executive told us that we would have to wait eight years to see whether value for money was being delivered for bill payers. This is too long for hard-pressed consumers to wait.

“Ofgem must get its act together and scrutinise these near monopolies more effectively. Simpler charging methodologies are needed to strengthen the market’s ability to scrutinise costs and increase the pressure for greater cost-saving efficiencies.

“Barriers preventing smaller players from entering the market must be removed to drive down costs for consumers.”